Two African lions roared this week, reminding the world that the days when colonial powers scrambled for a piece of the continent are gone for ever.
The $1,09-billion takeover bid of Ashanti Goldfields, Ghana’s premier company, by AngloGold, South Africa’s largest and the world’s second-largest gold producer, has shown that Africa can transform itself without giving up an inch of its mineral wealth, analysts noted last week.
The nod by Ashanti’s board and its biggest shareholder, Lonmin (the world’s number three platinum miner), would, once the Ghana government gives the green light, catapult the merged gold producer into the number one position in terms of gold reserves and resources. Its 7,3-million ounces of annual gold production will also put it within striking distance of world leader Australia’s Newmont’s eight million ounces.
The announcement reverberated around the world, especially at the epicentre of the globe’s economy, the United States, where both companies listed on the New York Stock Exchange during the past decade.
The size of the deal is huge, even in the lexicon of recent gold mergers and acquisitions, and is ranked seventh out of 22 mergers since 1996.
No one doubts that the biggest-yet foreign direct investment in Ghana will boost its economy. In fact, as Nick Goodwin, a gold analyst at local stockbroker Tradek, said, Ghana will benefit more out of the deal than will AngloGold.
Goodwin, also known as South Africa’s gold guru, noted that Ashanti hardly had any money left for capitalisation in the wake of its hedging fiasco, which saw the company facing a hedging loss of $450-million, and big margin calls from banks after the gold price started climbing unexpectedly two years ago.
Ashanti had its full production hedged over five years at the upper end of the $200/oz gold price level, expecting it to collapse. Instead, what was supposed to be good news for the industry turned into a nightmare, with the gold price climbing to more than $320/oz and now expected to rise to $400/oz before the end of the year.
AngloGold has only 30% of its production hedged — this will increase to 39% once AngloGold Ashanti Limited is born.
The benefit for AngloGold is a boost in production from a source that can only improve on its delivery — which has been described as “laid back” by some industry watchers. In contrast, AngloGold (and its CEO Bobby Godsell) is constantly praised for its managerial approach, while the South African company’s ability to do deep mining is beyond reproach.
Ashanti also brings to AngloGold a portfolio of complementary top-tier, low-cost and long-life gold mines, as well as attractive exploration opportunities.
The key to the merger lies 200km north-west of Ghana’s capital city Accra — the Obuasi gold mine. Although highly profitable, Obuasi is performing far below its potential.
According to Godsell, “we can work effectively together, using AngloGold’s existing financial and technical resources to maximise the upside potential of this combination, particularly in relation to the deep-level underground development of the Obuasi mine”.
Sam Jonah, chief executive of Ashanti, said AngloGold and Ashanti “are synonymous with excellence in gold mining. The combined strength of the new group will unleash a new African giant on the gold mining industry. The immense technical and financial strengths of the new group will enable the realisation of the full potential of the Obuasi mine in the shortest possible time frame.”
The merger would also boast long-life assets, with six operations in five countries with combined reserves of 45,1-million ounces and life-of-mine plans of 15 years or longer.
At issue is the viability of mining ore. It takes 10 to 12 years to start a new mine, not to mention huge capitali- sation costs.
So why did big players such as Newmont not jump at the opportunity to invest in Ghana, especially in the light of the so-called “African discount” attached to operational costs?
Goodwin believes the answer lies partly in the foreign-held fear of political instability on the continent and partly in local companies’ eagerness to do business in Africa.
A replay of Newmont’s hostile bidding war with AngloGold over Australian gold producer Normandy in 2001 (which Newmont won) is also highly unlikely if the price-to-earnings ratios of First World producers are anything to go by.
Ashanti is often held up as an African success story — proof of commitment to building a modern market economy. It was the first African company to join the New York Stock Exchange, in 1994.
Ghana is also a country of firsts. In 1957 it was the first country in sub-Saharan Africa to emerge from colonialism. It experienced the highest gross national product on the continent before an economic crisis in the late 1970s and it has rebounded since launching one of the first economic recovery programmes in the region nearly 15 years ago.
According to the World Bank, Ghana enjoyed the highest per capita income in the region at independence but, by the early 1980s, per capita income had fallen by a third while inflation was running at more than 100%.
In 1983 the government launched an aggressive programme of stabilisation and economic liberalisation. It sought to reduce budget deficits and create a market-friendly environment. In the decade that followed gross domestic product (GDP) growth averaged 5%, and physical and social infrastructure was rehabilitated.
Beginning in the latter half of 1999 Ghana suffered a trade shock in the form of falling prices of its two main exports, gold and cocoa, and rising prices for petroleum imports. This, together with a delay in adjusting fiscal and monetary policy, led to a deterioration in macroeconomic performance.
Since January 7 2001 — following the first democratic election since independence in 1957 — the government has put in place a macroeconomic programme aimed at getting Ghana out of its debt trap by reducing government borrowing, cutting public enterprises deficits and restructuring the domestic debt. Overall, performance in the past year has been mixed. GDP growth has averaged about 4,5%, while inflation has slowed down to 15%.
AngloGold and Ashanti expect to hear by mid-September whether the Ghanaian government will accept the offer. According to analysts this should be a formality, even though Ghana’s 17% shareholding of Ashanti gives it the right to veto management changes.
Reuters news agency quoted Ghanaian Finance Minister Yaw Osafo-Maafo as saying Ghana’s government was not opposed to AngloGold’s bid and had agreed with the South African firm that it would be able to hold on to its so-called golden share.
That the merger would have no comparison by any standard is unquestionable but the jury is still out on whether others will follow suit and make the stated aims of the New Partnership for Africa’s Development a reality.